In Charitable Giving Part I, I outlined developments in the tax laws that impact charitable giving. As a generous group of people, the reason why we give is not solely for the tax deduction, right? So, with the tax implications in mind, how can we give?
1. Direct Donation. A gift of money to a charitable organization is always welcome, and so may be outright gifts of real estate, conservation easements, IRA distributions, or appreciated stock, whether publicly-traded or in a closely-held business. If we itemize, then the charitable deduction has to be taken in the year the contribution was made and at fair market value (FMV), except in some cases. For certain types of contributions, such as real estate, an appraisal is required.
A donation must be made to a ‘qualified organization,’ such as a 501(c)(3), in order to be deductible. At the IRS’s website, you can download a list of all qualified organizations. Churches and governmental units are not required to apply for this status, so they are not on the list, but they are considered qualified organizations for the purposes of giving. If you receive a benefit as part of your donation, the value of the benefit must be deducted from the value of your contribution. The value of your time spent volunteering cannot be deducted, unfortunately, but some expenses relating to volunteer work may be deductible. A written record of a charitable donation is required, such as bank records, written receipts, and any appraisal obtained.
2. Legacy gift. While we are alive or upon our death, we can set up a charitable fund that allows us to give now and into the future. A charitable fund may be set up to fund a specific charitable goal or charity; fund a scholarship; or allow the donor to advise how funds are to be distributed. Local Foundations and larger organizations such as ‘Community Giving’ help individuals and businesses set up such charitable funds.
From a tax perspective, making a larger charitable donation in one year offers some tax advantages. For example, instead of donating $5000 per year to different charitable organizations over the span of ten year and getting no tax deduction, an individual could donate $50,000 in one year, set up a donor-advised fund, and claim the deduction in the first year. Another opportunity is to donate appreciated property. An asset with a low cost basis offers another opportunity to reap some tax advantages. Special rules apply, of course, but you may donate an asset with a low basis to a qualified organization, receive a charitable income tax deduction at FMV, while not having to recognize and be taxed on the capital gain. Shares of stock that have appreciated in value work well for this example.
Of course, as part of our estate plans, we also have the opportunity to make bequests to charities or organizations in our will or trust. Such charitable contributions have the tax benefit of reducing the size of an individual estate and potential estate tax liability at the state and federal level.
Lastly, from the perspective of the organization to which you would like to give, it’s important to keep in mind what type of gifts the organization prefers to receive. Gifts of money are always welcome, of course, and some organizations have wish lists to help donors make a decision on giving. Before you deed over real estate or a unique asset to your favorite charitable organization, it’s a good idea to find out if they are set up to receive it and receive the most benefit from your charitable intentions.
In the end, charitable giving is a way to make a statement on what’s important to you and how you want to make a lasting impact on the world. From a simple donation to complex estate planning, our tax laws continue to support charitable giving, recognizing that charitable giving remains integral to the life and health of our charitable organizations and communities.
Any requests for topic suggestions may be sent to firstname.lastname@example.org. Although we cannot give you legal advice through the column, we can provide some general information that may be helpful for you to know. Our purpose is to educate and we hope that you can take something new away from this column each time you read it. Please consult your legal, tax, and financial advisors to discuss your particular situation.